Causes of BOP Disequilibrium – The Diagnosis! 🕵️♂️
Why does a country spend more than it earns? The causes are divided into three categories.
1. Economic Factors 💰
- Developmental Expenditure: Developing countries (like India) import huge machinery/tech for growth. This costs money.
- Inflation: If inflation in India is high, our goods become expensive. Foreigners stop buying (Exports fall). Indians buy foreign goods because they are cheaper (Imports rise).
- Cyclical Fluctuations: Recessions in global markets reduce demand for our exports.
- New Sources of Supply: If Vietnam starts making cheaper shirts, India's shirt exports fall.
2. Political Factors 🏛️
- Political Instability: If a government is unstable, foreign investors (FDI) run away. Capital outflow.
- Wars: Wars are expensive. You import weapons. You lose production.
3. Social Factors 👥
- Demonstration Effect: Indians see Hollywood movies and want to wear Nike and drink Coke. Imports rise due to "Westernization".
- Population Growth: More people = More demand for food/fuel. If domestic production is low, we must import.
The Oil Factor
For India, the biggest cause is Oil. When global oil prices rise, our Import Bill explodes, causing a massive BOP Deficit.
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 5
1. High inflation in a country usually leads to:
💡 Final Wisdom: "You can't blame just one thing. It's a mix of 'Wanting iPhones' (Social), 'Building Bridges' (Economic), and 'Bad Politics' (Political)." 🧩
Next up: Measures to Correct BOP - The Cure! 💊